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The UK logistics market will experience continued occupational demand above long-term averages, with third-party logistics distributors leading take-up, as organisations seek more flexibility in their supply chains. Vacancy rates will remain critically low, as build-to-suit development grows, and rising cost of finance and higher exit yields create a challenging environment for speculative development. Following a period of sustained repricing, logistics yields will stabilise. Industrial and logistics assets will remain attractive to investors with continued rental growth expected.

Key Takeaways

  1. Demand from occupiers will continue, with take-up volumes remaining above the ten-year average, albeit below recent record-breaking periods. 3PLs will lead take-up at a sector level, as companies seek greater flexibility and look to outsource their supply chain processes.
  2. Vacancy rate to remain at a critically low level, with lack of available units hindering take-up levels. Rising cost of finance, increasing construction costs and higher exit yields will create a challenging environment for development.
  3. Rental growth will continue, driven by the demand and supply imbalance. The growth rate will moderate compared to the quarterly double-digit rental growth levels experienced through 2021 and early 2022.
  4. Automation and advancement of electrical transportation will increase demand for power. A lack of sufficient power will become a deal breaker for occupiers when assessing potential buildings and sites.
  5. Following a period of sustained repricing, logistics yields will stabilise, potentially sooner than other sectors. The logistics sector will reinforce its position as a major contributor to total real estate investment and will remain an attractive asset class.

Lack of new supply could squeeze take-up levels

Following a record-breaking period, take-up levels have started to moderate, but occupier demand will likely continue through 2023 and remain above the 10-year average. Big box logistics space under offer at the end of Q3 totalled 16.8m sq ft (up 27% YoY), indicating that appetite from occupiers for warehouse and manufacturing space is still strong, despite caution over the impact of the cost of living on consumers, and a slowdown in retail spend.

Demand is being driven by an increasingly diverse range of occupiers with third-party logistics distributers leading the way at a sector level, a trend which is being observed across Continental Europe and the US. We anticipate this trend to continue as organisations seek greater flexibility and increasingly look to outsource their supply chain processes. This is likely to be accelerated as companies continue to be subjected to further energy price uncertainty in respect of both power and fuel, fluctuations in retail demand, and wider economic risks.

Whilst occupiers’ prioritisation for buildings in traditionally prime locations will persist, we expect to see growth in take-up for buildings in ‘off prime’ or secondary locations. This will be driven by lack of availability of buildings in prime locations that meet occupiers’ required specifications, in addition to the affordability of rents in these areas. We also expect to see an increase in the numbers of occupiers looking to be located adjacent to major rail hubs, benefitting from potential savings in transportation costs, whilst reducing their carbon footprint.

Figure 11: UK annualised rental growth, CPI and forecast

Source: CBRE Research and ONS (rental growth is the weighted average, calculated by rentable space)

New, grade A units will be quickly absorbed

Despite a record amount of space under construction, the UK logistics occupational market continues to be very tight, with new grade A stock being quickly absorbed by occupiers. This is translating to critically low national vacancy rates; sub 2% for the last five quarters. At current take-up levels, there are only two months of ready-to-occupy space available, and we anticipate that the supply response through 2023 will continue to be insufficient to satisfy demand. Any new stock will be attractive to occupiers, with the acute lack of supply potentially restricting take-up levels, despite demand persisting.

We have also seen a resurgence of occupiers turning to build-to-suit developments due to the lack of available speculative units, weakening developer risk-appetite, and increasingly bespoke occupier requirements. We anticipate this trend will continue with a growth of build-to-suit development next year.

With rising ‘all in’ cost of debt finance, increasing construction costs, and higher exit yields, we expect that some speculative developments may become unviable, further impacting supply.

Rental growth to moderate

As supply will remain constricted, we will see continued rental growth across all regions, most pertinent in the Midlands and North of England. Rental growth is likely to be lower than the double-digit quarterly rental growth experienced in recent quarters but will be significantly above growth levels seen prior to the pandemic.

Power provision is becoming increasingly critical

Whilst the cost of power is of concern to occupiers, it is the availability of and access to that power that is becoming increasingly challenging. Without sufficient power operating from a particular building or site, it may become too onerous. The supply of energy to sites via the National Grid is finite, and providing additional power through new connections and sub-stations is expensive and a protracted process.

Demand from occupiers often includes an element of ‘future-proofing’ for their business, particularly with the growth of automation and the advancement of electrical transportation. The challenge occupiers will face is obtaining that power to meet technological advances, whilst doing so in a sustainable way. Developers are alive to the issues, with many new schemes offering solar ready provisions and power saving initiatives, a trend we will continue to see through next year and beyond.

I&L still contributing major share of real estate investment

The industrial and logistics investment market this year has been characterised by a period of repricing, with prime yields quickly moving out up to 100 bps by Q3, from the historic lows seen in Q1. By the end of 2022, prime yields will have moved out as much as 150 bps from the beginning of the year.

Repricing thus far has been most substantial in the logistics sector, outpacing other real estate sectors. We anticipate that the bulk of repricing of prime logistics assets will have happened this year, with early 2023 seeing a slowdown in prime yield movement before stabilising towards the end of the year.

Despite total real estate investment decreasing, the apportionment of investment for industrial and logistics has remained resilient, contributing 30% in Q3. Fund allocations are still targeting the industrial and logistics sector, which will continue to be attractive for investors due to anticipated continued rental growth.

Figure 12: UK real estate investment by I&L and other sectors, and I&L % of total investment

Source: CBRE Research (‘other sectors’ include office, retail, residential, healthcare, hotel and other)

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